Capital Gain Tax is least understood but most discussed topic. Capital Gain Tax is a vast topic. If i will cover both Short Term Capital Gain Tax and Long Term Capital Gain Tax in a single post then it will be injustice. Indian Tax system is very complex & it is equally difficult to explain it in a simplified manner. In this post, we will cover Short Term Capital Gain Tax and next post will be dedicated to Long Term Capital Gain Tax. To start with basics, lets understand what is Capital Gain. Capital Gain means the profit earned from the sale of Capital Assets like Property, Shares etc. Though it is referred as Capital Gain but not necessary that you always book Capital Gain from sale of Capital Assets. If you incur loss from sale of Capital Assets then it is referred as Capital Loss. For taxation purpose, Capital Gain / Capital Loss can be further classified as Short Term Capital Gain Tax / Loss or Long Term Capital Gain Tax / Loss depending on the Holding Period of a Capital Asset as specified in the Income Tax Act or amendments to Income tax Act. For example, in this years budget the definition of Minimum Holding period for Long Term was increased from 1 year to 3 years for Debt Mutual Funds. In short, if Debt Mutual Fund is held for less than 3 years then any gain will be treated as Short Term Capital Gain. In case, holding period is more than 3 years then any gain arising out of sale of Debt Mutual fund will be treated as Long Term Capital Gain.
What are Capital Assets ?
Following 6 assets are classified as Capital Assets which come under the ambit of Capital Gain Tax
(a) Stocks and Equity Oriented Funds: Any direct investment in stock or Equity oriented Fund. Imp point to note is definition of Equity Fund for taxation purpose. Though we have multiple categories of mutual funds like Large Cap, Small Cap, Balanced Funds, Monthly Income Plan, Debt Mutual Funds etc but from tax perspective there are only 2 type of funds i.e. Equity Mutual Funds and Debt Mutual Funds. Any fund which invest min 65% of its AUM (Assets under Management) in equity market is classified as Equity fund.
Balanced Funds: The confusion is related to status of Balance funds. Depending on market fluctuations, the investment of Balanced funds in equity segment vary from 55% to 70% therefore if equity exposure of Balance fund is less than 65% then it will be treated as Debt Fund from tax perspective else it is Equity Fund. Why it is imp, the min holding period for long term is 1 year for equity fund. Whereas for debt funds, min holding period is of 3 years for long term therefore capital gain tax treatment will depend on Min Holding period.
(b) Bonds and NCD’s (Non Convertible Debentures)
(c) Debt Oriented Funds: Any fund with less than 65% exposure in equity segment will be treated as Debt oriented fund from capital gain tax perspective.
(d) Gold ETF’s and Gold Funds
(e) Bullion and Jewellery
(f) Real Estate
Minimum Holding Period for Long Term / Short Term Classification
Holding period is the time period between Date of Purchase and Date of Sale of a capital asset i.e. period for which the capital asset is held by the individual. If the asset is held for more than Min Holding Period for long term as specified in Income tax act then Gain / Loss from capital asset is Long Term Capital Gain and tax will be Long Term Capital Gain Tax. If the capital asset is held for less than Min Holding period then it will be Short Term Capital Gain Tax.
The minimum Holding Period for Long term for each of the capital asset is as follows
(a) Stocks and Equity Oriented Funds: 1 Year
(b) Bonds and NCD’s (Non Convertible Debentures): 1 Year
(c) Debt Oriented Funds: 3 Years
(d) Gold ETF’s and Gold Funds: 3 Years . The reason for change in Min Holding period of Gold ETF and Gold Fund from 1 year to 3 years from current FY is because of treatment of Gold ETF and Gold Funds at par with Debt oriented funds. In short, equity exposure of Gold ETF’s and Gold Funds is less than 65% therefore these funds are now treated at par with Debt oriented funds for capital gain tax purpose.
(e) Bullion and Jewellery: 3 Years
(f) Real Estate: 3 Years
How Short Term Capital Gain is Calculated?
It is very simple, you just need to find out simple gain by subtracting purchase price from sale price. Example, if you bought property worth 50 lakhs in April, 2013 and sold it for 60 lakhs in Oct, 2014. Since holding period is less than 3 years therefore Short Term Capital Gain will be 60 lakhs – 50 lakhs = 10 lakh. In case of property, cost of improvement and cost of transfer can also be included in the cost of acquisition for capital gain tax calculation.
Few important points related to Short term capital gain.
(a) Any losses from business or profession can be set of against short term or long term capital gain only during the Financial year in which the business losses are booked. Any carry forwarded business losses cannot be set off against capital gains.
(b) Short term capital gain tax cannot be saved u/s 54 i.e. by re-investment in property or buying capital gains bond issued by REC or NHAI. Section 54 is available only to set off Long Term Capital Gain and save Long Term Capital Gain Tax.
Short Term Capital Gain Tax Rate
Except for Stocks and Equity oriented Funds, any short term capital gain tax from rest all capital assets class is taxed at marginal tax rate i.e. as per Income Tax slab of the taxpayer. Short term capital gain tax on Stocks and Equity oriented funds is flat 15% irrespective of income slab of the tax payer. Continuing with same example of short term capital gain calculation, if the tax payer is in 30% income tax slab then Short Term Capital Gain Tax will be 30% of 10 lakh i.e. 3 lakh.
Imp Note: Above calculation is only indicative because if you add Short Term Capital Gain (STCG) to income then there is a possibility that income tax slab of the user will change because of increase in taxable income. In this case, STCG will be calculated in 2 parts. For example, if my taxable salary is 9 Lakh and short term capital gain is of 3 Lakh my taxable income will increase from 9 lakhs to 12 lakhs accordingly my income tax slab will increase from 20% to 30%. In this scenario out of 3 lakh short term capital gain, 1 lakh will be taxed at 20% and balance 2 lakh will be taxed at 30%.
Short Term Capital Loss
Not may tax payers are aware that Short term capital loss can be booked and carry forward for upto 8 financial years. Any short or long term capital gain booked during 8 subsequent years can be offset against Short term capital loss booked by the tax payer. Short term capital loss can be set off against both short term or long term capital gain. One of the biggest misconception is that capital loss can be adjusted against head of “Income”. It is not true, you cannot adjust capital loss against Income from salary or any other source of income.
Another smart strategy to save tax is that if you are in 20% or 30% tax bracket then you should offset short term capital loss from stocks and equity oriented funds against short term / long term capital gain from capital assets other then capital gain from stocks and equity oriented funds. Reason being short term capital gain tax on Stocks and equity is 15% whereas short term gain from other capital assets is taxed at marginal rate i.e. income tax slab (20% or 30%). You can pay short capital gain tax at 15% on stocks and equity & set off short term losses against gains where you need to pay short term capital gain tax at 20% or 30% i.e. as per income tax slab. In highest tax bracket, you will save approx 15% tax by adopting this strategy.
To summarize, Short term capital gain is clubbed with the income and taxed at Marginal Rate i.e. income tax slab of the tax payer. Short term capital loss can only be offset against short term / long term capital gain.
I have tried to cover all important aspects of Short Term Capital gain tax in this post. In next post on capital gain tax we will discuss Long Term Capital Gain Tax. Hope you liked the post. You can share your comments, feedback and queries through following comments section.
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